The US Economic Crisis: Causes and Solutions

The US economy is currently experiencing its worst crisis since the Great Depression. The crisis started in the home mortgage market, especially the so-called " subprime " mortgages, and is now spreading beyond subprime to prime mortgages, commercial real estate, corporate junk bonds, and other forms of debt. Total losses of US banks could reach as high as two-thirds of the total bank capital, which would lead to a sharp reduction in bank lending, which in turn could cause a severe recession in the US economy. The paper analyzes the underlying causes of the current crisis, and also estimates of how bad the crisis is likely to be. Then, the government economic policies pursued so far (by both the Fed and Congress) to deal with the crisis are discussed. The final section makes recommendations for more radical government policies that the Left should advocate and support in response to this crisis. 1. The decline of the rate of profit To understand the fundamental causes of the current crisis, we have to take a long-run view of the entire post World War II period. The most important cause of the subpar economic performance in the US economy in recent decades was a very significant decline in the rate of profit for the economy as a whole. From 1950 to the mid-1970s, the rate of profit in the US economy declined almost 50%, from around 22% to around 12% (see Figure 1 at end of paper) This significant decline in the rate of profit appears to have been part of a general worldwide trend during this period, affecting all capitalist nations. According to Marxian theory, this very significant decline in the rate of profit was the main cause of both of the " twin evils " of higher unemployment and higher inflation, and hence also of the lower real wages, of recent decades. As in periods of depression of the past, the decline in the rate of profit reduced business investment, which in turn has resulted in slower growth and higher rates of unemployment. An important new factor in the postwar period is that many governments in the 1970s responded to the higher unemployment by adopting expansionary fiscal and monetary policies (more government spending, lower taxes, and lower interest rates) in attempts to reduce unemployment. However, these government policies to reduce unemployment generally resulted in higher rates of inflation, as capitalist firms …